Do not invest in tea at current levels: Motilal Oswal Sec

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Alok Agarwal of Motilal Oswal Securities, says that Indian exports of tea  have been taking a hit largely because of high cost of production.Though the quality has not been an issue, the pricing has been one, he adds.

Agarwal believes that the Indian bulk tea manufacturers may benefit due to the Kenyan drought impact. Talking about investing in the tea sector at this point in time, he says, that on a short term basis, an investor may hurt himself. Therefore, he suggests investing into the sector after the prices come down and after seeing how the Kenyan drought pans out.

Excerpts from CNBC-TV18's exclusive interview with Alok Agarwal:

Q: What does this mean for the Indian tea companies? Can they step-in because Kenya, largely an exporter, exports to UK, Pakistan and the big markets? Can Indian companies step-in or will others be taking its place?

A: Indian exports have been taking a hit largely because of high cost of production. Though the quality has not been an issue, the pricing has been one. So, I do not think exports can cover up for the entire loss. But if Kenyan tea production were to fail because of the drought, then I think exports could pick-up to fill in as India is the largest tea producer in the world and Kenya and Sri Lanka follow it. Therefore, in that case, Sri Lanka and India will cover that up .

Q: Which are the companies that are most likely to gain, the ones which have their in-house plantations?

A: McLeod Russel , of course, clearly is the king with 70 million kilogram. If the average price of tea were to go up by Rs 10 next year, they will make Rs 70 crore of additional PBT in one straight year, which is lot of money. After that you have Jayshree Tea and Industries  and Goodricke Group , which look good to me. I think these three companies would stand out as investments.

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Q: What about Tata Tea and HLL?

A: Tata Tea and HLL are in different brackets; they are branded players. We are basically talking about bulk tea manufacturers. So, if tea prices were to go up, even they would gain. But they have done well in current year too; their strategy is different. They are basically placing their brands.

The companies to benefit from this would be bulk tea manufacturers like McLeod, PJ Coffee and Tea, Jayshree, Dhunseri Tea and Industries , Warren Tea  etc. I would like mentioning a caution here for the investors because the tea companies' stocks have gone up significantly last week. So, we are only ones in the market. We understand the sector pretty well. There is a lot of frenzy moving into this, only because of the small news item that Kenyan tea production could get impacted.

I am optimistic on a long-term basis. But on a short-term, if an investor buys a stock at the current level, he may hurt himself. So, let the prices come down a bit and wait for this Kenyan drought to pan out to get into the stock.

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